This paper explores the possibility of a non-linear relationship between Asian equity
and foreign exchange markets. The non-linearity is modeled using a regime-switching
Markov model. We find evidence of non-linearities where the effect of changes in the
exchange rate on stock market returns is regime-dependent except for Hong Kong
whose strong currency peg contributes into the segmentation of its stock and foreign
exchange markets. Using a quadratic approximation, we find only limited evidence of
non-linearities within each regime. The results lend little support to the proposition that
moderate depreciations are associated with increases in stock returns while large ones,
short of a currency crash, have negative effects on equity markets.